Benchnotes June 2025

By Christina Sanfelippo, Aaron M. Kaufman and Bradley D. Pack1

Nonconsensual Third-Party Releases Are Permissible in Chapter 15 Cases

Hon. Thomas M. Horan of the U.S. Bankruptcy Court for the District of Delaware recently held that the U.S. Supreme Court’s decision in Purdue Pharma2 does not preclude a bankruptcy court from entering an order in a chapter 15 case enforcing a foreign plan containing nonconsensual third-party releases of claims against a nondebtor. In In re Real,3 the foreign representative commenced a chapter 15 case and petitioned for recognition of the chapter 15 debtor’s Mexican bankruptcy case (the “Mexican prepack proceeding”) as a foreign main proceeding. The foreign representative also asked the court to render assistance to the Mexican court by enforcing the plan that the Mexican court had approved (the “Concurso plan”).

A party-in-interest objected (the “objecting party”) to the enforcement of the Concurso plan, arguing that it could not be recognized under 11 U.S.C. §§ 1507 and 1521 in its current form because it contained nonconsensual third-party releases.4 The objecting party argued that §§ 1521(a) and 1507 — the chapter 15 “catchalls” — were analogous to the catchall in § 1123(b) at issue in Purdue Pharma. Since neither § 1521(a) nor § 1507 discusses third-party relationships, the Supreme Court’s analysis in Purdue Pharma compelled a finding that the nonconsensual third-party releases were impermissible.

Before considering the extent of a bankruptcy court’s authority to enforce orders entered in a foreign main proceeding under §§ 1507 and 1521, Judge Horan pointed to the policy statement in § 1501, which highlights that courts should be guided by the main policy goals of chapter 15: cooperation and comity with foreign courts and deference to those courts within the confines established by chapter 15. Consistent with the guiding principles of comity, U.S. bankruptcy courts should aim to maximize assistance to the foreign court conducting the foreign main proceeding.

With these underlying policy goals in mind, Judge Horan turned to the plain language of §§ 1521(a) and 1507, finding that the sections were readily distinguishable from § 1123(b). Section 1521(a) begins with an explanation that a court may grant “any” appropriate relief, then enumerates some of the relief that a bankruptcy court may grant at the request of a foreign representative. The term “including” indicates that the enumerated relief is not a complete and exclusive list. While the “any ... including” language in § 1521(a) might appear similar to that in § 1123(b), the qualifying language in § 1521(a) states that any additional relief that a court grants should be of the kind that is available to a trustee.

In contrast, the qualifying language in § 1123(b) provides that a court may include any “other” chapter 11 plan provision that is not “inconsistent with the applicable provisions of this title” — meaning similar relief concerning the debtor and its rights, responsibilities and relationships. Moreover, § 1521(a)(7) identifies the specific relief that a court is not permitted to grant under that section, and that list does not include nonconsensual third-party releases. Congress did not expressly enumerate what it wanted to prohibit under § 1123(b), but instead directs courts to look to the Bankruptcy Code as a whole to determine whether the requested provision is consistent with it.

Finally, Judge Horan found support for his reading of § 1521(a)(7) under the canon of expressio unius. By establishing a list of relief that courts should not grant under § 1521(a)(7), the section implies that other forms of relief not expressly prohibited are permitted. For these reasons, Judge Horan concluded that the enforcement of foreign orders providing for nonconsensual third-party releases is permitted under § 1521(a).

Turning to § 1507, Judge Horan noted that the statute affords courts an even more expansive grant of power to provide relief than already found in § 1521(a). While the “additional assistance” available to foreign representatives under § 1507 is limited by the remainder of chapter 15, chapter 15 covers a broader array of topics than § 1123(b), which is limited to matters concerning and connected to the debtor. Section 1507(b) also establishes a list of considerations for courts when determining whether to provide such additional assistance, which focus on principles of comity. Thus, § 1507 also differs from § 1123(b) because § 1123(b) does not expressly establish specific boundaries and instead directs courts to look to the rest of the Code to determine whether a provision is appropriate. Having determined that the Mexican prepack proceeding provided all the protections set out in § 1507(b), Judge Horan concluded that § 1507 also authorized him to enforce the relief entered in the Mexican prepack proceeding.

Judge Horan found further support for his reading of the statutes in the legislative history and canons of statutory construction. Again, the major purpose in enacting chapter 15 was to promote comity for the orders of foreign courts. As relevant to the case at hand, nonconsensual third-party releases are widely accepted by foreign courts, and such releases are permissible under Mexican law. Thus, Judge Horan reasoned that enforcing the releases in the Concurso plan would be consistent with the policy of providing assistance to foreign courts and granting comity to their orders.

Finally, Judge Horan rejected the argument that the nonconsensual third-party releases in the Concurso plan were manifestly contrary to U.S. public policy because of Purdue Pharma and thus should not be enforced under § 1506. He explained that the word “manifestly” in international usage restricts the public-policy exception to the most fundamental policies of the U.S. While the objecting party did not object to the fairness of the proceedings, Judge Horan nevertheless concluded that the Mexican proceeding comported with U.S. standards of procedural fairness, and that the Concurso plan does not violate any constitutional or statutory rights.

The only argument made by the objecting party was that nonconsensual third-party releases are manifestly contrary to U.S. public policy because the Purdue Pharma decision prohibits them in most chapter 11 plans. However, the lack of specific availability in U.S. courts does not equate manifest contrariness to U.S. public policy, especially where, as here, nonconsensual third-party releases are expressly permitted under § 524(g) in the context of asbestos cases and could be made available more broadly by a simple act of Congress, as the Supreme Court noted in Purdue Pharma. Accordingly, the objecting party’s public-policy exception argument failed, and Judge Horan entered an order enforcing the Concurso plan, including the nonconsensual third-party releases.

Miscellaneous

• In re Parkcliffe Development LLC, --- B.R. ---, 2025 WL 320909 (Bankr. N.D. Ohio Jan. 28, 2025) (after court approved stalking-horse bidder and corresponding bidding procedures, stalking-horse bidder objected to several overbids, arguing that bids were noncompliant with procedures for various reasons; stalking-horse bidder argued that overbids should be struck to avoid fraudulent inflationary scheme to force stalking-horse bidder to pay more; court heard evidence and concluded that the overbids were not fraudulent or presented in bad faith, and that intended purpose of bidding procedures required debtor to hold auction to attain highest and best outcome for creditors; court recognized that this may deter stalking-horse bidders in future, but court found that this risk was outweighed by risk of secured and unsecured creditors opposing resulting sale for failing to achieve best return for creditors);

• In re Elebute, --- F.4th ---, 2025 WL 429584 (5th Cir. Feb. 7, 2025) (after chapter 13 case was closed, debtor filed lawsuit in state court to prevent creditor’s foreclosure; creditor removed lawsuit to bankruptcy court and moved to reopen chapter 13 to avoid inconsistent rulings; bankruptcy court reopened case and, when debtor failed to appear, dismissed debtor’s removed lawsuit for want of prosecution; district court found no appellate jurisdiction over interlocutory order reopening case and affirmed order dismissing removed lawsuit; on further appeal to Fifth Circuit, debtor challenged subject-matter jurisdiction over his removed state court lawsuit; court of appeals affirmed, concluding that order reopening bankruptcy case was “only a preliminary step in some phase of the bankruptcy proceeding,” and not one that could be reviewed or merged into order dismissing removed lawsuit; court of appeals further held that bankruptcy court had “related to” subject-matter jurisdiction over removed lawsuit: “The bankruptcy court reopened [the debtor’s] bankruptcy case because its earlier judgment potentially precluded the state action. So the bankruptcy and state actions clearly relate to each other. As a result, the bankruptcy court had jurisdiction to enter an order dismissing the adversary proceeding”);

• In re Corben, --- B.R. ---, 2025 WL 607669 (Bankr. S.D.N.Y. Feb. 25, 2025) (court granted ex-husband’s motion to dismiss debtor’s chapter 13 case with prejudice for debtor’s bad-faith conduct; undisputed facts demonstrated that debtor filed her chapter 13 to avoid being incarcerated for her pre-petition violations of state court orders; debtor was indisputably ineligible to proceed in chapter 13 because her debts exceeded chapter 13 debt limits; moreover, debtor made no plan payments to the chapter 13 trustee in four months post-filing; for these reasons, court found debtor’s filing to have been made in bad faith and warranted special treatment: Any subsequent bankruptcy filing would not stay her ex-husband’s judicial and nonjudicial collection remedies, unless court for cause ordered otherwise);

• In re Reis, No. 24-4201, 2025 WL 618363 (9th Cir. Feb. 26, 2025) (U.S. Trustee objected to individual debtor’s election to proceed under subchapter V of chapter 11, alleging that debtor’s medical school debt did not qualify as debt arising from “commercial or business activity” and therefore at least half of debtor’s debt did not arise from commercial or business activities for purposes of eligibility to be subchapter V debtor under 11 U.S.C. § 1182(1)(A); bankruptcy court held that debtor’s medical school student loan debt did not arise from commercial or business activity; district court affirmed; court of appeals reasoned that while phrase “commercial or business activities” in 11 U.S.C. § 105(51D) is exceptionally broad, this debt could not qualify as commercial or business activity because debtor did not operate her own business until more than a decade after she began medical school; thus, court of appeals affirmed);

• In re Long, --- B.R. ---, 2025 WL 721124 (Bankr. S.D. Ohio March 4, 2025) (court denied debtor’s § 107 motion to seal settlement motion and corresponding settlement agreement, concluding that debtor did not meet his burden of demonstrating what confidential information needed to be protected from public disclosure; settlement resolved debtor’s claims under the FCRA; under terms of settlement, parties agreed not to disclose settlement to anyone other than debtors’ counsel, chapter 7 trustee and bankruptcy court, but court found that a private agreement among settlement parties was insufficient to establish legal basis to restrict access to settlement agreement; alleged “confidential information” in settlement agreement did not meet this definition; rather, parties agreed to limit access to avoid exposing settling defendants to further liability; court held that such information was not “confidential information” because it did not give commercial competitors unfair advantage over defendant, as it was merely undesirable to have it made public; thus, motion to seal was denied);

• In re 305 East 61st Street Group LLC, --- F.4th ---, 2025 WL 678645 (2d Cir. March 4, 2025) (court of appeals affirmed lower courts’ dismissal of claims for breach of fiduciary duty and aiding and abetting fiduciary duty, agreeing that these claims were derivative and belonged to debtor’s estate, but court of appeals vacated judgment of lower courts, holding that claims for breach of contract and for breach of implied covenant of good faith and fair dealing were direct claims assertable by individual members of company, not derivative estate causes of action belonging to estate; court of appeals reasoned that although all claims were “anchored in the [debtor’s] alleged wrongful conduct as to the company, with effect that impacted all members’ rights,” such claims were personal claims belonging to member individually to enforce member’s own contractual rights, therefore test under New York state law requiring that direct claims be dismissed if they were “embedded in the harm to the corporation” did not apply);

• In re Aguilar, --- B.R. ----, 2025 WL 1089063 (Bankr. S.D. Fla. April 11, 2025) (bankruptcy court held that “the notice” referred to in Bankruptcy Rule 3002(c)(7) means actual notice of deadline to file proof of claim and not notice in general that debtor has filed for bankruptcy; in so holding, court adopted in full analysis set forth in In re JC Farms LLC, 2024 WL 3352120 (Bankr. E.D. Mo. 2024), which found language of rule ambiguous and looked to history of rule to ascertain that “the notice” in Bankruptcy Rule 3002(c)(7) means notice of time to file proof of claim; in case at hand, creditor’s agent may have had notice of bankruptcy case, but creditor had not received notice of deadline to file proof of claim; therefore, court concluded that creditor did not receive notice sufficient to give it reasonable time to file proof of claim);

• In re Carolina Sleep Shoppe LLC, 2025 WL 1122411 (Bankr. W.D.N.C. April 15, 2025) (bankruptcy court held that subchapter V case may be closed prior to entry of discharge where debtor’s plan was nonconsensually confirmed under § 1191(b) if court finds that requirements of § 350 and Bankruptcy Rule 3022 have been satisfied; as initial matter, in reading § 350 in conjunction with Bankruptcy Rule 3022, which governs entry of final decree in chapter 11 cases, court found that Bankruptcy Rule 3022 implicitly requires discharge of trustee in chapter 11 case prior to case being closed; therefore, to close subchapter V case prior to discharge of debtor with a nonconsensually confirmed plan, (1) the subchapter V trustee must have been discharged, and (2) estate must be fully administered; with respect to the first requirement, Bankruptcy Code does not provide for subchapter V trustee’s discharge if plan is nonconsensually confirmed under § 1191(b) likely because role of subchapter V trustee varies widely in nonconsensual cases; as such, determination of when subchapter V trustee’s services shall terminate in such case is matter of discretion and should be determined based on particular facts and circumstances of each case; in case at hand, bankruptcy court concluded that trustee’s duties had been terminated because reorganized debtor was responsible for all distributions under plan, substantial consummation of plan had occurred, and trustee’s duties were set to terminate upon substantial consummation; with respect to second requirement, court first concluded that a discharge is not determinative in the analysis of whether assets of estate have been completely and legally disposed of under § 350(a); its conclusion relied in part on precedent involving traditional chapter 11 cases for individual debtors, which largely allow debtors to close their case prior to entry of discharge and to subsequently move to reopen case for purpose of obtaining discharge; applying factors set forth in Bankruptcy Rule 3022, court found that estate had been fully administered, and thus, under statutory mandate contained in § 350, court closed case and entered final decree); and

• In re ESML Holdings Inc., --- F.4th ----, 2025 WL 1119944 (3d Cir. April 16, 2025) (Third Circuit held that sealing of documents in bankruptcy cases is governed by § 107 and not by the common law right of access; in considering whether § 107 displaces common law public right of access in bankruptcy proceedings, court acknowledged that while common law yields to statute enacted by Congress to govern particular question, there is longstanding rule that statutes which invade common law are to be read with presumption favoring retention of long-established and familiar principles; accordingly, to abrogate common law principle, statute must “speak directly” to question addressed by common law and sufficiently differ from common law; turning to statute’s text, Third Circuit explained that § 107 governs sealing of information and documents filed in bankruptcy cases, and thus speaks directly to question addressed by common law — namely, whether and under what circumstances judicial records may be sealed; moreover, § 107 diverges from common law such that it displaces, rather than merely codifies, doctrine; information that is permitted to be sealed under § 107 is broader than information that could be protected under common law doctrine, which would require that disclosure of this information “will work a clearly defined and serious injury to the party seeking closure”; moreover, under § 107(b), bankruptcy courts lack discretion to decline to protect covered information, thereby eliminating balancing of public and private interests required by common law rule; accordingly, Third Circuit concluded that § 107 displaces common law standard for sealing judicial records in bankruptcy cases).

Christina Sanfelippo is a member with Cozen O’Connor in Chicago. Aaron Kaufman is a partner with Gray Reed in Dallas. Bradley Pack is a shareholder with Engelman Berger, PC in Phoenix.